The popularity of bridging loans among small business owners in the UK has been growing steadily for years. In fact, Q4 2018 brought about a new all-time quarterly record in UK bridging loan applications and related activity.
Providing short-term funding for all purposes with interest rates as low as 0.43% per month, bridging finance continues to offer a lifeline for businesses in time-critical situations. However, the subject of bridging finance regulation remains largely misunderstood.
Here we explain how bridging loans are regulated in the UK.
The three types of bridging loan
As of April 2014, the UK’s Financial Conduct Authority (FCA) took over all aspects of bridging finance regulation for the UK, which involved transference of all outstanding Consumer Credit Act (CCA) loans to the FCA. For the most part, the implications of the FCA’s takeover were limited to bridging finance applicant eligibility.
Today, the subject of bridging loan regulation can be simplified by splitting bridging finance into three categories - regulated loans, exempt loans and unregulated loans.
The details outlined below provide a very brief overview of the characteristics of each, rather than constituting expert financial advice.
1. Regulated bridging loans
The objective of the FCA is to bring accountability and responsibility to the UK’s financial service market, through the introduction of wide-reaching rules and regulations. Having taken control of bridging finance regulation in April 2014, the FCA now regulates two different types of bridging loans:
- It regulates first charge bridging loans by reference to its Mortgages and Home Finance: Conduct of Business (MCOB) rules, if the property used to secure the loan is the home of the applicant or one or more members of their family. This is referred to as a 'regulated mortgage contract'.
- It regulates second charge bridging loans by reference to its Consumer Credit (CONC) rules, again where the property is the home of the applicant or one or more members of their family. This is referred to as a 'consumer credit loan'.
2. Loans exempt from regulation
Exemption from regulation applies when a bridging loan falls initially within the established regulation parameters, though is ultimately considered exempt in accordance with one of the three exemption categories:
- first charge bridging loans that are secured against a property that neither the applicant nor any member of their family lives in at the time;
- second charge bridging loans secured against the home of the applicant or one or more members of their family, where the value of the loan exceeds £25,000 and is being taken out for business purposes;
- second charge bridging loans secured against the home of the applicant for one or more members of their family, where the applicant is classified as a high net worth individual.
Each of these classifications may exempt a bridging loan from FCA regulation.
3. Unregulated bridging loans
The third and final category is that of unregulated bridging loans, which are comparatively rare on the UK market. Unregulated loans are neither regulated by the FCA nor bracketed within the exemptions detailed above.
Generally speaking, unregulated bridging loans are provided exclusively for business purposes in the UK, issued to limited liability companies and other corporate entities.
Making sense of financial regulation
Additional information on the current regulatory framework can be found on the FCA’s official website. If struggling to make sense of regulation and the potential benefits of a regulated bridging loan, organise a consultation with an independent broker or financial adviser.
Bridging finance can be provided in a number of forms for a wide variety of business applications. It’s simply a case of pairing your preferences and requirements with an affordable loan from an established and reputable bridging loans specialist.
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